No matter what size your business is, it’s always a good idea to know its net worth. Financial statements and balance sheets are critical for any business to decide where it should be heading. There’s nothing worse than spending hours and hours working on ideas that aren’t going to work (we’ve all been there).
On the surface, it sounds simple but it isn’t. Are you … – Blowing up your revenue? – Living below your means? – Investing in your dream?…or just scratching by month-to-month? Business Net Worth lets you know where you stand and helps you track your financial goals
What is a Business Net Worth?
In accounting, net worth is calculated by subtracting liabilities from assets. This number can be positive or negative, depending on how the numbers shake out.
A business net worth is a snapshot of the company’s financial health at a given point in time. It’s an important calculation that credit analysts and investors use to gain an understanding of a company’s value and potential for growth.
To calculate your business net worth, you’ll need to know your total assets and total liabilities.
How to Calculate a Business Net Worth?
Calculating net worth is simple: It’s the difference between your assets and your liabilities.
To calculate net worth, you need to know the value of your assets and liabilities.
Here are the steps to follow to arrive at your number:
List your assets – List your current business assets — that is, everything you own that has monetary value. Include cash on hand, accounts receivable, equipment and inventory. Don’t include intangible assets like copyrights or goodwill (the value people place on a well-known brand name). Also don’t include things that don’t have an easily calculable value, such as client lists or office furniture.
List your liabilities – List everything you owe — also known as liabilities. This can include loans, credit card balances, and other types of debt.
Subtract liabilities from assets to calculate your business net worth.
Why you should calculate your business net worth?
Calculating your business net worth can be a helpful tool if you have plans to sell your business or you’re trying to understand how it is performing,
Here’s why you should calculate your business net worth:
It helps you understand the value of your business. It gives you a benchmark that helps you to analyze future growth/loss. Business owners can see how much of their total value is made up of assets when compared to liabilities. Business owners can use this analysis to determine whether now is the time to sell and what price you can expect for it.
Knowing your business plan can help you plan with better data. If your business has a lot of debt, you may want to hold off on expansion plans or hiring new employees until you see the situation improve. A negative net worth could be a sign that something’s not right with your business, and you should take steps to improve it before growing too much.
May play a great role when it comes to financing. Banks and other lenders will look at your business net worth as part of their decision-making process. A negative net worth could cause them to turn down your request for financing, or give you less favorable terms for a loan than they would if your net worth were positive.
It helps you make sound investments. When buying an asset, investors look at how much the asset is likely to be worth in the future in comparison to what it costs today.
Conclusion
The biggest benefit of calculating your business net worth is that it forces you to sit down and think about how much work you’ve done, and how much you’re worth.
The importance of calculating and tracking your net worth is a little different for each business owner. It’s very important to entrepreneurs, for example, because of the added risk associated in owning a business. But it’s also hugely beneficial for freelancers, because profits tend to be irregular and unpredictable.
In the end, the most important factor is commitment. Tracking your net worth gets easier over time with practice, but the main thing to remember is that the benefits can be tremendous.